Gasification plants in Illinois dead or on life support

Record low natural gas prices threaten future of 'clean' coal plants

An artist's rendering of the proposed Power Holdings of Illinois plant in southern Illinois that will convert coal to synthetic natural gas using "clean" technology. (Handout)

A few short months ago, the future looked bright for three coal plant developers with the idea that they would create a new market for the state's abundant, but dirty, coal.

Proponents even called the coal "clean" because it wouldn't be burned and sent up a smokestack the old-fashioned way. Instead, the coal would be chemically transformed into natural gas and piped into homes for heating or used as a fuel to generate electricity.

But record low prices for natural gas are threatening to snuff out developers' plans for gasified coal, which is far more expensive than natural gas.

A $2 billion plant proposed by Power Holdings of Illinois appears to be the first casualty. The plant, which was to bring 250 permanent jobs to Washington County, is dead for now, the company said Thursday.

"When natural gas prices are at historic lows, it makes it kind of hard to convince people to enter into contracts that are three times the price," said Christopher Stone, lobbyist for Power Holdings.

A second coal gasification plant by New York-based Leucadia National Corp. slated for Chicago's Southeast Side is opposed by Ameren Illinois and Nicor Gas. The Legislature mandated they purchase the expensive gas produced by the plant, but the companies say they're being asked to pay more than their fair share.

A third plant proposed by Nebraska-based Tenaska Inc. that originally planned to use gasified coal as a fuel to create electricity now is offering to use natural gas, citing low natural gas prices.

"The fact of the matter is natural gas prices are low, demand is flat or in some places on the decline," said Howard Learner, executive director of the Environmental Law and Policy Center. "The market is very tight for anybody proposing to build a new plant."

Here is a plant-by-plant status report:

Power Holdings

When Power Holdings first began lobbying the Legislature in 2006, the U.S. was coming off natural gas prices that had reached $13 per million British thermal units. Then new technology opened up vast natural gas deposits, and prices have fallen to around $2 per million Btu.

Last year Gov. Pat Quinn signed into law a bill mandating that the state's utilities purchase gas produced by the Power Holdings and Leucadia plants. Utilities had the option of either signing contracts to purchase the gas or being subjected to rate reviews every two years — an expensive and onerous process utilities usually seek to avoid.

With the prospect of Power Holdings and Leucadia selling their coal-produced natural gas at three to four times the price of natural gas, two utilities slated to purchase it — Integrys Energy Group-owned Peoples Gas and North Shore Gas — refused to sign the contracts.

Power Holdings hoped to fill that Chicago-size hole in its business plan by convincing other utilities to take more of the gas or even by downsizing the plant if investors were amenable, but they weren't able to find the backers.

"It was detrimental to the project," said Christopher Stone, lobbyist for Power Holdings.

Peoples Gas and North Shore Gas said they'd rather face rate reviews. Job creation and economic development would not outweigh the economic damage to their customers, they said.

"We stand by our decision and our customers in declining to buy costly, synthetic gas over a 10-year or longer period at a time when natural gas supplies are abundant and the price for natural gas is incredibly low," said Will Evans Jr., president of Peoples and North Shore Gas.

A coal mine was also proposed for the project, and Illinois-based Power Holdings owns an option to develop the property from Washington County. The company would not comment on the status of that option.

Leucadia

Leucadia faces the same problem. With no buyer for 16 percent of its output, the company is attempting to negotiate a deal that would have Ameren Illinois and Nicor Inc. purchasing more of its gas to fill the hole.

But Nicor has sued in DuPage County Circuit Court to block the contract and is fighting the issue at the Illinois Commerce Commission.

The argument: that while the company is required to purchase a certain percentage of natural gas from the plant, it shouldn't have to pay the extra costs associated with building and operating the plant.

"Leucadia tried to shift a disproportionate amount of the costs of the project to Ameren and Nicor Gas," said Nicor spokeswoman Annette Martinez. "Under the law, no one gas utility can be required to purchase more than 42 percent of the output of the Leucadia plant. Despite this, Leucadia wants Nicor Gas and Ameren customers to pay gas prices that would cover over 95 percent of the cost to build and operate the project."

The utility opposed the deal and the Illinois Commerce Commission, which regulates utilities, agreed. That decision is in a rehearing process and the lawsuit is ongoing.